MNI POLICY: RBA Eyes Rent Boom In Fight To Tame Inflation

The Reserve Bank of Australia is examining whether housing rental costs might have more inflationary momentum than suggested by the relatively subdued gains recorded by the official Consumer Price Index, with private measures of new leases showing much higher rates of increase, MNI understands.

The RBA, which expects inflation to have peaked around 8% in in the fourth quarter, is trying to get a better read on the pace and durability of rent rises following household composition changes triggered by Covid and the embrace of work-from-home practices. As the RBA plots a decline in inflation back to its 2-3% target range, it expects rents - as measured by the CPI - to continue to rise over coming months even as other components of the CPI basket pull back from elevated levels. (See MNI RBA WATCH: RBA Hikes By 25bps, February Increase On Radar)

October's monthly CPI data from the Australian Bureau of Statistics showed the stock of rents, including both new and continuing leases, growing at a national annual average of 3.5%. However, private sector measures indicate prices for new rental agreements are rising much more quickly.

NEW RENTS SOAR

SQM Research estimated capital city asking rents jumped 1.5% in the 30 days to Dec 20, bringing the 12-month rise to 25.1%, while broader national rents soared 17.5% year-on-year. CoreLogic estimated rents rose 10% in the 12 months to September, easily outpacing the 2.8% rise included in September quarter CPI. Rocketing rents are being driven by a national vacancy rate of only around 1%.

Complicating the inflation calculus is the annual rebalancing of the CPI and Living Cost Indexes released on Dec 20, which delivered a 1 percentage point reduction in the housing group weighting, from 23.24% to 22.24%. Rents subtracted 0.48 percentage point, with the ABS claiming "there was a relatively small increase in both the number of dwellings rented and rent prices". The weighting of rents in the CPI was lowered to 5.75% from 6.23%.

The issue of rent increases stoking inflation has also been noted by the U.S. Federal Reserve. Chairman Jerome Powell said at the December press conference that leases were being renewed at higher rates, but the rate of increases was coming down. The New Tenant Repeat-Rent Index, compiled by the Federal Reserve Bank of Cleveland and the U.S. Bureau of Labor Statistics, fell to an annual pace of 6% in Q3, down from 11.9% in Q2.